How much is my final salary pension worth?
Discussion
LeoSayer said:
Is there a formula for working out how much (say as a % of my salary) this is worth. I’m trying to calculate the total value of my current salary and benefits to compare to other jobs on the market.
I am currently 1/52th of my salary per year.
Its difficult with a FS scheme... do you make any contribution to it ?I am currently 1/52th of my salary per year.
I have one that I get 1/60th per year worked up to a maximum of 40 years service.. Our company "expense" for that works out at about 27% of my annual basic salary (but thats rises and falls each year and is affected by how funded the scheme is...
That doesnt tally up with the transfer value though...
I would reckon in real terms for a fully ppaid for scheme around 12-15% of basic salary
Years of service divided by 52 multiplied by your salary will give you the annual pension you have accrued so far.
Your contribution is almost irrelevant as the pension is guaranteed and your employer has to contribute whatever an actuary tells them they need to to provide your guaranteed pension at retirement. The transfer value is also pretty meaningless as you'd probably be mad to transfer out of a Final Salary pension.
If you've got a friendly IFA they could probably use their pension comparison software to tell you what sort of contribution you'd need to make into a Personal Pension to get the same pension your Final Salary pension would give you. As most employers these days have Group Personal Pensions or other Money Purchase arrangements this figure could be very helpful although it's likely to be a lot more than you or most employers would consider paying. It will also give you an idea of why most Final Salary Pensions have closed or are closing!
Your contribution is almost irrelevant as the pension is guaranteed and your employer has to contribute whatever an actuary tells them they need to to provide your guaranteed pension at retirement. The transfer value is also pretty meaningless as you'd probably be mad to transfer out of a Final Salary pension.
If you've got a friendly IFA they could probably use their pension comparison software to tell you what sort of contribution you'd need to make into a Personal Pension to get the same pension your Final Salary pension would give you. As most employers these days have Group Personal Pensions or other Money Purchase arrangements this figure could be very helpful although it's likely to be a lot more than you or most employers would consider paying. It will also give you an idea of why most Final Salary Pensions have closed or are closing!
Edited by stevejh on Friday 7th November 21:32
Yes, there is a formula! Roughly:
1/52 * (1+s)^t * (1+r)^(n - t - x) / (1+i)^(n - x) * An
Where
x = current age
s = expected rate of future salary increases
r = expected rate of future price inflation
i = discount rate (to allow for time value of money, i.e. interest rate)
t = number of remaining years you expect to remain with your current employer (or the number of years before they stop providing a final salary scheme if less!)
n = pension scheme normal retirement age
An = cost of buying an annuity of £1 pa at age n (allowing for pension increases and spouse's pension as per your scheme rules)
Obviously the result depends massively on the assumptions that you make.
For example, using x=40,s=5%,r=3%,i=5%,t=10,n=65,An=24 say (assuming index linked pension and 50% spouse's - see www.annuity-bureau.co.uk for rates)
1/52 * (1.05^10)*(1.03^15)/(1.05^25)*24 = 0.35, i.e. 35% of salary each year
Don't forget to knock off whatever you have to contribute towards the cost
Cost depends a lot on assumptions. E.g. if assume s=3% and i=6% (which may be appropriate if you don't expect your salary to increase by more than inflation and you are not confident that your employer's scheme will be able to afford to pay out when you get to retirement) then the cost goes down to 23% of salary. If you think you'll only live to age 75 then the value to you is even lower at c. 9% of salary (by setting An to 10)
I've got a spreadsheet with this calculation set up, if that would be useful. Just PM me.
I really do need to get a life though
1/52 * (1+s)^t * (1+r)^(n - t - x) / (1+i)^(n - x) * An
Where
x = current age
s = expected rate of future salary increases
r = expected rate of future price inflation
i = discount rate (to allow for time value of money, i.e. interest rate)
t = number of remaining years you expect to remain with your current employer (or the number of years before they stop providing a final salary scheme if less!)
n = pension scheme normal retirement age
An = cost of buying an annuity of £1 pa at age n (allowing for pension increases and spouse's pension as per your scheme rules)
Obviously the result depends massively on the assumptions that you make.
For example, using x=40,s=5%,r=3%,i=5%,t=10,n=65,An=24 say (assuming index linked pension and 50% spouse's - see www.annuity-bureau.co.uk for rates)
1/52 * (1.05^10)*(1.03^15)/(1.05^25)*24 = 0.35, i.e. 35% of salary each year
Don't forget to knock off whatever you have to contribute towards the cost
Cost depends a lot on assumptions. E.g. if assume s=3% and i=6% (which may be appropriate if you don't expect your salary to increase by more than inflation and you are not confident that your employer's scheme will be able to afford to pay out when you get to retirement) then the cost goes down to 23% of salary. If you think you'll only live to age 75 then the value to you is even lower at c. 9% of salary (by setting An to 10)
I've got a spreadsheet with this calculation set up, if that would be useful. Just PM me.
I really do need to get a life though

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